Monetary Policy | |
Monetary Policy | |
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PROSHARE | |
PROSHARE |
Monday,
March 23, 2020 /10:20 AM / by FBNQuest Research / Header Image
Credit: Nearpod
The
monetary policy committee (MPC) meets today and tomorrow in Abuja. As we wait
to see whether it joins the 39 monetary authorities that cut benchmark rates
across the world last week, we also hold our breath ahead of possible changes
to the CBN's exchange-rate regime. The temptation is to make the textbook
response to the squeeze on demand that we trace to the crashing oil price and
the spread of the coronavirus, and cut the policy rate of 13.50%. Egypt managed
300bps and South Africa 100bps but they have strong financial intermediation.
The pass-through from the policy rate to the real economy in Nigeria is
weak in comparison, which the committee and the CBN acknowledge in their more
honest moments. Policymakers tend to see the cash reserve requirement (CRR)
ratio and, in the past six months, the loans-to-deposit ratio (LDR) as their
policy tools of choice.
The CBN set out its initial response to the coronavirus last week with
an easing of terms for borrowers under its many credit schemes and a small new
intervention of its own. (Good Morning Nigeria, 17 March 2020).
As elsewhere, the rapid unfolding of events has forced the federal
government to step up its response. The rewriting of the 2020 budget to slash
the oil export price assumption to US$30/b, and remove N1.5trn in spending, is
underway. Also under discussion are a far larger CBN intervention of N1trn to
push import substitution in manufacturing, the securitization of some of the
ways and means advances by the CBN, and an N100bn credit for healthcare.
Our preference would be the fiscal stimulus through the CBN working
closely with the local banks. In other jurisdictions, the scope for monetary
accommodation is limited because the benchmark is already very low/negative. In
Nigeria's case the scope is large but the issue is the pass-through.
Following a meeting of his economic advisory council, President Buhari
was quoted referring on Friday to a fx "realignment". Unnamed senior officials
in the CBN translated the presidential reference to mean unification of the
rates. It is said to have transacted at N380 on Friday although one source
placed the deal in NAFEX and another in the preferential window (of N307).
(Neither explanation is borne out by the daily FMDQ report.)
Given the global headwinds, the trend for central banks to make bold
policy responses and the steady diminution of the CBN's reserves, changes to
the fx regime appear to be coming.
We recall the liberalization that wasn't in June 2016 and think that the
CBN's preference remains a relatively small adjustment to a level it is
confident it can hold/manage. (If it couldn't, it would merely repeat the
exercise).
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